Pricing the risk–transfer financial instruments via Monte Carlo methods

Interim Reports on work of the International Institute for Applied Systems Analysis receive only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute, its National Member Organizations, or other organizations supporting the work. Abstract The paper is devoted to nding the present value of catastrophe bonds using a combination of Monte Carlo and Iterative Stochastic Equation methods. Apart from general methodology, three practical examples of catastrophe bonds connected with earthquakes are also considered. For these examples algorithms in pseudocode with procedures originated from catastrophe simulation software are provided. The methodology presented in this paper may be also used for other types of risk{transfer nancial instruments. Some of these possibilities are described.